It seems reason has left the trading pits of Pakistan Stock Exchange. Fear has taken over. With three trading halts in a week, the story of equity market is known to all and sundry by now. It is the unknown that matters, and we all know how fear of the unknown manifests itself.
In the last three weeks, other regional countries have taken a far bigger beating than Pakistani equities. Indonesia, Malaysia, India, Viet Nam – have all had it rougher than Pakistan, if calculations by AKD Securities are any guide. But even without having it as rough as the region, Pakistani equities are currently offering the most lucrative returns. Which is perhaps why long-term players have been buyers in the market instead.
After having risen substantially from its August-2019 bottom, the KSE-100 had set out to take a correction and reassess whether Pakistan’s economy was only undergoing stabilization, or whether there was genuine growth on the horizon. Then hit COVID-19. Between 24Feb-20 and 13-Mar-20, a lot of shares have changed hands – where banks, insurance and companies have been net buyers. In other words, players who have deep enough pockets to hold and look calm even in the face of loss.
During this time, sector rotation has also happened. When oil prices sank, so did local mutual funds since about a third of their portfolio was in oil and gas. Hence, cement stock rose as funds and insurance sought safer havens. Shares in the sector were also helped by the fact that a certain punter (who shall not be named) was forced into short covering after having been caught poorly by his shorts, particularly in certain cement stocks.
The market action today and tomorrow is critical. On paper there should be some breathing space if not a rebound, following some recovery in Dow Jones over the weekend. The weekend itself should have given investors some time to think and calm their nerves. And if shorts are temporarily banned in Pakistan ala Italy and Spain, then it should also help arrest bear spirits.
Tomorrow’s monetary policy decision and the exchange rate movement in wake of hot money outflows - the impact of which has proven hot-money enthusiasts wrong - is also going to set the tone. The latter may in fact hurt sentiments more, possibly eroding the balming effect of a possible rate cut.
If over the next few days, the KSE-100 miraculously climbs back up, not only crossing 37,000 points but also flirts with 39,000, then hopes may rekindle; not for solid recovery but for playing see-saw within a defined range. But if the index is not able to climb with conviction above these levels, then perhaps 34,000 will come to define the bottom, provided the crown-headed virus halts its march.
Unlike other black swan events such as flood, earthquakes, the trouble with pandemics is that they are evolving. As if it was not enough that a black swan has appeared; it is now flying about and making sounds to invite other colored swans from near and far, the extent, nature and duration of which isn’t known. There is no neat equation to forecast the impact of pandemics. That and the fact that it is fundamentally difficult to reason with fear and the unknown, might force further slide even beyond 34,000. It all depends on how corona pans out in Pakistan and elsewhere.